The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) has held that while assigned debt may be asserted, security interest over immovable assets of an Indian company cannot stand transferred to a foreign guarantor or its assignee without RBI permission under Section 31 of FERA, 1973. Therefore, Tropical could not be treated as a secured creditor in respect of Incab’s immovable properties.
The Tribunal further held that Tropical is a related party of Incab within the meaning of Section 5(24) of the IBC because Incab is part of Tropical’s step-down control structure through Leader Universal (Mauritius), attracting the Companies Act definitions imported through Section 3(37) of the IBC.
The Tribunal also held that FEMA Notification dated Sep 26, 2000 applied to Tropical’s claim, and the claim could be admitted only to the extent of the principal amount actually paid by Leader Berhad to the lenders, namely Rs. 85.79 crores. Any admission beyond that amount, especially the interest component, was contrary to Para 2A of the Notification. Post facto RBI approval was not available to overcome that statutory cap.
On related party status, the Division Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) observed that Tropical was rightly treated as a related party under Section 5(24) of the IBC. Tropical held 63% in Leader Universal (Mauritius), and that entity held 51.2% in Incab. Applying Section 2(87) of the Companies Act, including Explanation (a), the Tribunal held that Incab was a step-down subsidiary within Tropical’s control chain. The Tribunal also accepted that the control structure and common beneficial ownership supported the conclusion that Tropical was a related party.
On the HSBC component, the Tribunal found that the payment had been made by Leader Cable Industry Berhad and not by Leader Berhad itself. It also noted that no formal guarantee agreement had been executed between HSBC, Leader Berhad and the corporate debtor. Since Leader Berhad had not extended the HSBC guarantee, it could not have assigned that debt to Tropical. For that reason, the RP’s rejection of the HSBC-related secured claim was upheld.
On secured creditor status, the Tribunal drew a distinction between debt and security interest. It accepted that Leader Berhad had paid the lenders and that Tropical could assert the assigned debt. But it held that security over immovable properties of the corporate debtor could not automatically stand transferred to a foreign entity without RBI permission under Section 31 of the Foreign Exchange Regulation Act, 1973. Since no RBI permission was shown, and no charge was ever registered in favour of Leader Berhad or Tropical, Tropical could not be treated as a secured creditor in respect of Incab’s immovable properties.
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On the quantum of claim, the NCLAT disagreed with the NCLT’s view that FEMA Notification dated Sep 26, 2000 was inapplicable. The Tribunal held that Para 2A of that Notification clearly capped reimbursement by the resident principal debtor to the non-resident guarantor at the rupee equivalent of the amount actually paid by the non-resident guarantor. Since Leader Berhad had paid only Rs. 85.79 crores to Citibank and ICICI, Tropical’s claim could not lawfully include the massive interest component running into more than Rs. 1,500 crores. The Tribunal held that no claim could be admitted in CIRP contrary to that FEMA cap.
The Tribunal also rejected Tropical’s argument that RBI approval could be obtained later at the stage of payment. It held that the FEMA Notification itself imposed a substantive restriction, and not a defect capable of being cured by post facto approval. Therefore, Tropical could not seek post facto RBI approval to sustain admission of any amount beyond the actual principal paid by Leader Berhad.
On the challenge to the resolution plan and CoC distribution mechanism, the Tribunal found no illegality. It held that the CoC’s decision in the 22nd meeting to keep disputed allocations in an interest-bearing account pending final adjudication was a matter of commercial wisdom, and the NCLT had rightly approved the plan subject to the outcome of pending appeals. Tropical, being a related party and not a CoC member, failed to make out any ground under Section 61(3) of the IBC to interfere with that decision.
Briefly, Tropical Ventures Company Ltd. challenged the NCLT’s order which had upheld the RP’s decision treating Tropical as a “related party” and rejecting its HSBC-related claim. Pegasus Assets Reconstruction Pvt Ltd. challenged the NCLT’s order rejecting its objections to the RP’s re-verification of Tropical’s claim. Tropical also separately challenged the approval of the resolution plan to the limited extent of the CoC’s 22nd meeting decision on distribution.
Incab had availed credit facilities from ICICI Bank, Citibank and HSBC. Leader Universal Holdings Berhad, a Malaysian company, had furnished guarantees in favour of the lenders. After invocation of those guarantees in 2000–2001, Leader Berhad paid Citibank and ICICI, while HSBC was paid by Leader Cable Industry Berhad, a subsidiary of Leader Berhad. In 2007, Leader Berhad executed a deed of assignment in favour of Tropical for USD 1 on an “as is where is” basis. In CIRP, Tropical filed a financial creditor claim of over Rs. 2152.84 crores, of which the RP admitted a reduced amount and treated Tropical as a related party, excluding it from the CoC. Meanwhile, the CoC approved Vedanta’s resolution plan with 99.37% voting share.
The dispute before the Appellate Tribunal mainly turned on four issues: whether Tropical was a related party of the corporate debtor; whether Tropical could claim the HSBC amount; whether Tropical was a secured creditor; and whether the very large admitted claim, including interest, was permissible in light of FEMA Notification dated Sep 26, 2000. The Tribunal also examined whether Tropical could seek any interference with the resolution plan approval and the CoC’s distribution mechanism.
